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Chesapeake Energy (CHK) Monday morning was upgraded to outperform from market perform at BMO Capital. The brokerage house cited valuation as the reason for the upgrade, stating that the shares are "attractively priced at three times next year's expected discretionary cash flow compared to a median multiple of around five times at the group's larger peers," according to MarketWatch.
BMO also feels CHK's use of joint ventures to raise cash and finance capital expenditure could lead to higher cash flow yields and returns on capital, MarketWatch reported. Along with the upgrade, the ratings house assigned a price target of $30 per share for CHK.
Technically, this is a rather gutsy call by BMO as the last time the stock was in the $30 region was earlier this year (as can be seen on this chart). The stock currently faces its fair share of overhead resistance in the $20 region. One level of this resistance is CHK's 20-month moving average, which is now positioned north of the shares. Furthermore, the stock has reached the top band of its Bollinger Bands -- a technical formation that often suggests that the shares are due for a dip.
Taking all of these technical factors into consideration makes BMO's decision to assign a $30 price target a bit risky. The good news is that there is plenty of time for the move to come to fruition, as BMO looked toward next year in its statement. If the brokerage's assertions hold true, then this would be a good buying opportunity.
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